No hard landing in the home market

Apr 28 2012, 09:51 IST
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SummaryDespite a tough environment, developers have been able to avoid a market-wide crash through the gradual process of price discovery, and several other factors favouring them in the near term

The residential property market in India, particularly in the Tier I cities, has remained sluggish for the past 12 months, with significantly lower sale volumes when compared to the high absorption rates of 2010. Home loan interest rates now seem to be at their cyclical highs (but should soon decline) and unforeseen tax levies have come at a time when the industry is facing its moment of reckoning.

In these uncertain times, the question arises whether strategic decision-making for residential property developers to improve sales should follow the ‘root method’ — a comprehensive evaluation of options, or the ‘branch approach’ — a process of muddling through. In a multiple stakeholder environment with several large uncertainty input parameters, the branch approach seems to be the instrument of choice.

In adverse market conditions, developers want to ascertain facts on some key issues. They consider whether they should:

Lower prices in on-going developments

Proceed with construction

Launch new projects at lower prices

Sell non-performing assets such as land

The ‘Logic’ Of Home Pricing

While others require comprehensive evaluation, determining residential property prices usually entails a trial-and-error approach. During good times, prices are invented. When the going gets tough, prices are discovered (hence the term ‘price discovery’). Developers continually assess the market with trial price levels to increase sales in on-going projects. To avoid adversely signalling the market (which could lead to a downward spiral) prices in on-going projects are kept ‘sticky-upward’.

In the first phase, negotiations are held behind closed doors to test the market’s appetite. If sales do not recover, discounts are offered up-front on the table.

If there is still no perceived recovery, discounts are advertised to increase visitors to the sales office. At this stage, the market is said to have witnessed a correction.

This is fundamentally a process of ‘muddling through’, in which residential prices offered by developers in on-going projects rise like rockets but fall like feathers.

However, during a slowdown, developers try to register sales by launching new projects which are different from on-going projects - and priced much lower than the market average (the price levels being decided by the root method of decision making). Since new projects have a high construction risk, the lower price is somewhat justified and avoids the signalling effect to the market.

Trouble Ahead?

Is the Indian residential property market headed for a hard landing?

During the slowdown in 2009, prices in some on-going projects witnessed corrections while a large number of projects

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